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Hospitals Are Cutting Out Insurers as Middle Men

The health care industry is adapting to a rapidly evolving social and economic environment.  Nowhere is that more apparent than in the trend of hospitals offering insurance themselves and cutting out traditional insurers. In recent years, hospitals have become increasingly more powerful as they gobble up private practices and smaller provider organizations.  As they accrue more market share and financial resources, they have begun to see private insurers as unnecessary intermediaries that are taking a cut of their profits.

Taking their cues from other disruptive organizations like Amazon, which is almost single-handedly reordering the retail landscape, hospitals are beginning to recognize that can dictate the terms of operation with patients, insurers and, even, some government agencies. The almost 5,500 hospitals currently operating in the U.S. command almost $1 trillion in revenue and outlay annually, granting them enormous bargaining power that they appear eager to leverage.

The hospital industry is using its resources to carve out a position in the lucrative insurance market. It is an almost natural progression for hospitals considering the federal government’s push to insure as many Americans as possible.  With the government increasingly for insuring the public and more insurers leaving many of the Obamacare health insurance exchanges, the door appears to be wide open for other players to step in and offer consumers a highly desirable product.

Consolidation Growing Hospitals

The driving force behind the emergence of hospitals as insurers is the consolidation trend in the health care industry as a whole. There are a number of factors at play in this trend, but it began with the Affordable Care Act.  The Obama administration designed the law to nurture consolidation because they felt that there was too much redundancy in care delivery. They wanted larger, one-stop providers that could provide a seamless treatment experience and reduce waste.

The ACA encouraged hospitals to merge with independent clinics. Many private practices were not able to make the systemic changes that the government mandated, and were forced to sell out to larger organizations.  Between 2002 and 2009, the average annual number of hospital mergers was about 50.  However, this started to trend up in 2010, the year that the Affordable Care Act was passed.  In 2010, there were 73 mergers; 90 in 2011; and 100 in 2012.

Health Insurance

What Hospitals Can Offer

There are currently more than 400 hospital networks in the country, and a survey by the College Board found that almost 28 percent of them intend to launch health insurance plans in the next five years. In the near future, there could be more than a hundred hospital-generated health plans available in communities across the nation.

As these provider organizations accumulate more power, they are recognizing that they no longer need insurers to subsidize patient costs. In the past, it was very difficult to enter the insurance market because of the enormous financial investment necessary to launch, but these new, giant hospital networks are realizing that they now possess all the funds necessary to fund their own health plans.

Health insurance plans

There are a number of incentives for hospitals to diversify into insurance, but it primarily comes down to profits.  One of the most important reasons that health care organizations merged in the first place was that there is only a slim profit margin in health care, so they increase profits by growing in scale. Now that many of these systems can now finance their own plans, they can further diminish losses and expand the network even further.

Another concern driving this change is anxiety about consolidation among insurers. In the past year, Aetna made a bid to buy Humana, and Anthem is negotiating an acquisition of Cigna.  The result of these mega-mergers among the nation’s largest insurers could radically reshape the health care landscape.  The new private insurance titans that emerge from this wave of takeovers may hold too much bargaining power, which is why some provider networks are developing insurance alternatives.

It is early in the growth cycle, so hospitals have yet to make a big impact on the insurance markets, but they are setting the foundation for future success. In an initial bid to appeal to consumers, many hospitals are offering discounts that undercut traditional insurers. While this may seem like the traditional play of a new entrant to the market, you should keep in mind that almost all hospitals determine the prices of their services, so they may not be leaving as much money on the table as it would appear.

Future of American Health Insurance

Health insurance in the U.S. is undergoing major changes, regardless of how much competition new hospital health plans pose.  Much of the ongoing evolution in the markets is rooted in the health insurance exchanges established by the Affordable Care Act.  What was intended to be an easily accessible insurance marketplace for consumers has become a shopping wasteland offering too few products at exorbitant rates.

Many major insurers that originally offered health plans on the exchanges have decided to exit for more profitable markets.  This has left many regional exchanges with only one or a handful of participating insurers.  Many hospitals view this as an opening for them into the insurance business; while profitability may not be had, it does enable them to establish themselves in an important niche market.

There are, of course, some major hurdles for hospitals before they can join the ranks of other insurers.  They must obtain insurer licenses in the states in which they want to operate, and they must prove that they have sufficient capital to meet statutory requirements. More importantly, they must attract a sizable clientele to mitigate the risks of insuring patients; analysts recommend that insurers have at least 100,000 in their insurance pool to spread risks.  Hospitals must promote their plans to consumers, not only to build an enrollment population, but also obtain market share.

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